Funding new models of green finance for the African continent creates channels for private finance to flow into previously neglected areas of climate action and conservation.
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Category: News
Financing a fair and inclusive transition to Net Zero
What is the Just Transition Finance Challenge?
The Just Transition Finance Challenge is a flagship initiative to mobilise more public and private capital into investments that support a Just Transition to Net Zero in the UK and other developed and emerging markets.
Launched by the Impact Investing Institute, with the support of the City of London Corporation, it brings together leading global financial institutions with over £3.6tn of assets and assets under management, including public and private asset owners, asset managers, development finance institutions and advisors, who are committed to financing a Just Transition.
This session presented a new coalition of key investors committed to mobilising capital towards impact investing and ensuring that the investment for a transition to Net Zero is inclusive and socially beneficial.
Moderated by Laurie Spengler, CEO of Courageous Capital Advisors and Senior Advisor for G7 Impact Taskforce, the panel consisted of Sharon Johnson, Chief Operating Officer, AgilityEco; Maria Nazarova-Doyle, Head of Pensions Investments and Responsible Investment, Scottish Widows; and Anne-Marie Chidzero, Chief Investment Officer, FSD Africa Investments.
A report released today by the Climate Policy Initiative finds that Africa needs approximately USD 2.8 trillion, or USD 250 billion each year, between 2020 and 2030 to implement its Nationally Determined Contributions (NDCs).
The study shows that total annual climate finance flows in Africa for 2020, domestic and international, were only USD 30 billion, just 12% of the amount needed. The financing gap is significant: All African countries together have a GDP of USD 2.4 trillion (World Bank 2021), implying that 10% of Africa’s current annual GDP needs to be mobilized above and beyond current flows every year for the next 10 years.
This analysis is based on the 51 out of 53 African countries that provided data on the costs of implementing their NDCs. Collectively, they represent more than 93% of Africa’s GDP.
Africa needs approximately $2.8 trillion between 2020 and 2030 to implement its NDCs. Out of this $2.5 trillion must come from international public sources and the domestic and international private sectors. These needs represent 10% of Africa’s total annual GDP.
South Africa, Ethiopia, Nigeria, and Egypt have the highest needs per year, together representing almost USD 151 billion per year. These needs as a percentage of GDP vary across countries. For instance, South Africa and Ethiopia have needs of 32% and 23% of their GDP, respectively. While Nigeria’s needs ($12 billion) are only 3% of the national GDP. Similarly, Egypt estimates needs of around $7.3 billion, less than 2% of its GDP.
Adaptation accounted for only 24% of total climate finance needs identified, despite Africa being highly vulnerable to climate change and calls for a better balance of finance between mitigation and adaptation. Adaptation needs are likely to be underestimated due to a lack of data and technical expertise to estimate the true cost of adaptation measures.
Mitigation accounts for the largest share of reported needs in 2020-2030, at 66% of total climate finance needs. Mitigation needs are predominantly split across four sectors: transport (58%), energy (24%), industry (7%), and agriculture, forestry, and other land use (AFOLU) (9%). However, results are heavily weighted to a few countries, in particular South Africa, which accounts for most transport needs. Excluding South Africa, the composition of mitigation needs per sector is energy (39%), AFOLU (27%), industry (20%), and transport (10%).
The private sector has significant potential to meet Africa’s climate finance needs. Public funding alone will not be sufficient, given the magnitude of investments needed, and current and future constraints on public domestic resources in Africa. However, most current climate financing in Africa is from public actors (87%, USD 20 billion) with limited finance from private actors.
To mobilize private finance, public actors need to improve policy frameworks and investment environments and deploy concessional financing to target investment barriers. Investment barriers are typically context-specific but can include technology-specific barriers such as uncertainty with respect to performance; policy barriers such as uncertain permitting processes; investment environment barriers such as lack of liquid financial markets; and bankability barriers such as off-taker creditworthiness and high debt costs.
This paper is part of The State of Climate Finance in Africa series from Climate Policy Initiative, The Children’s Investment Fund Foundation, and FSD Africa. The Landscape of Climate Finance in Africa report will be published later this summer.
Enhancing Egypt’s efforts on ESG, strengthening local and regional insurance businesses and supporting investments towards innovation for climate resilience.
Egypt’s financial market is set to benefit from announcements made by the UK government in partnership with FSD Africa in enhancing activities aligned to decarbonisation, resilience, and natural capital.
Through a series of stakeholder engagements and high-level meetings with leading institutions and policymakers, the partners identified and committed to supporting Egypt’s efforts in climate risk management and human development by paying special attention to the country’s vulnerable populations.
Since 2016, Egypt has undertaken a series of reforms aimed at strengthening the local economy and attracting foreign investments. These reforms have helped the economy avoid many of the adverse impacts of the Covid-19 pandemic. As the Egyptian economy looks to recover and respond to new challenges, including the economic impact of the war in Uk initiatives such as those announced this week will further boost national efforts for building a more resilient economy.
Key highlights of the engagements include:
Support towards innovation for climate resilience
Egyptian-based tech start-up Baramoda won a Fintech x Climate Resilience Startup challenge. The challenge sought to identify solutions working to improve the resilience of climate-vulnerable communities in Africa.
Baramoda’s solution focused on maximizing the efficiency of agri-waste management by addressing soil pollution and agricultural waste. Baramoda innovates organic soil improvers and fertilizers from different types of agricultural waste. This tailored compost is made from organic and natural components for the health of Egyptian land.
Recently, FSD Africa announced similar support for Africa-focused fintech startups with solutions that enable climate resilience in the most vulnerable communities.
FSD Africa also participated in an eye-opening investor roundtle with leading Egyptian venture capitalists hosted by the American University in Cairo (AUC) Venture Lab discussing Climate Resilience solutions.
Sign-up for The Nairobi Declaration
FSD Africa recognises the contribution insurers can make to climate change and in producing better outcomes for the continent. To this end, the organisation has urged Egypt-based stakeholders to commit to the Nairobi Declaration on Sustainable Insurance as a first step toward creating a sustainable insurance industry and building resilience for the continent.
The partners have stressed the importance of all businesses across Africa in engaging with the net-zero ambitions, agreeing that by playing its role, the insurance industry will be critical in building a sustainable environment for the future.
MoU with the Egyptian Financial Regulatory Authority to advance the implementation of ESG principles in North Africa
FSD Africa is in advanced discussion with the Egyptian Financial Regulatory Authority (FRA) to jointly drive the integration of ESG principles across the insurance sector in Egypt. Through the MoU, FSD Africa and the FRA will directly engage with local insurers and, in due course, work together to deliver the Africa Climate Finance Leadership Course in North Africa.
The Africa Climate Finance Leadership Course will enhance the capacity of regional policymakers, regulators, academia, and financial market participants to support climate-related projects. The training will also provide guidance for these regional actors to access climate funds from global sources and fast-track capital mobilization for climate projects across North Africa.
FSD Africa is committed to working with regulators and government agencies to identify, mitigate and manage climate risks and opportunities. Through our new partnerships, Egypt and its neighbouring countries will have an opportunity to significantly address the risks of climate change and accelerate the transition to a high-potential green economy.
Mark Napier, CEO – FSD Africa
The pilot project aims to give 100,000 refugees in Rwanda access to financial services through mobile phones.
Together with Equity Bank Rwanda PLC, we have just launched in the field a Financial Inclusion for refugees (FI4R) programme that aims to provide financial services to over 90,000 refugees in Rwanda.
Through this programme, refugees will be able to access mobile banking & agency banking services like opening accounts, receiving, and sending money, saving, digital loans, insurance and others through unstructured service data (USSD) channels. Furthermore, the project will provide financial literacy training to equip the refugees with knowledge on how to manage their finances.
The need to extend financial services to vulnerable groups like refugees, cannot be understated. With easier access to financial services and knowledge of how to manage their personal and business finances, refugees across Rwanda will be able to transact safely and with ease. Access to and usage of financial services can allow low-income households, including refugees, to build assets, mitigate shocks, increase resilience, and contribute to the local economy.
The project builds on earlier work funded by FSD Africa and Access to Finance Rwanda (AFR) in partnership with UNHCR following a market assessment done by BFA Global that outlined refugees financial needs and provided a business case for financial institutions to serve them. It also identified barriers refugees face when accessing financial services and offered solutions to overcoming them.
The project was officially launched in Mahama Refugee Camp in Kirehe District, Eastern Province. Mahama Refugee Camp is the largest refugee camp in Rwanda, hosting over 47,000 refugees from Democratic Republic of Congo, Burundi and several other neighbouring countries.
Refugees have financial and other needs like everybody else. It is therefore imperative for the financial sector to serve them just as they would anybody else. Refugees are engaged in economic activities, have incomes and spend; the financial system should facilitate such activities.
Kuria Wanjau, Programme Manager for Fragile Communities and States
There are plans to expand the project to refugee populations in Uganda and the Democratic Republic of the Congo.
The launch of FSD Ethiopia and partnerships with Ethiopia Investments Holding will enhance efforts to deliver beneficial development and financial outcomes for a stronger more resilient national economy.
Ethiopia’s financial markets have been boosted by a series of announcements and commitments by Financial Sector Deepening (FSD) Africa, a specialist development agency working to strengthen financial markets across sub-Saharan Africa.
The announcements were made as part of a week-long visit led by senior leaders from the UK-Aid funded agency in collaboration with partners. These included the Ethiopia Ministry of Finance, Ethiopia Investments Holding, National Bank of Ethiopia, and the UN Environment Programme’s Principles for Sustainable Insurance Initiative (PSI).
From progress in establishing a securities exchange to launching FSD Ethiopia and solutions to help the country’s insurance industry respond to climate change, the initiatives will enhance the strength and health of Ethiopia’s f markets, building the foundations for a stronger more resilient national economy.
18th May – Establishment of the Ethiopia Securities Exchange: Ethiopia’s Ministry of Finance, the Ethiopian Investment Holdings and FSD Africa signed a cooperation agreement to establish the Ethiopian Securities Exchange (ESX). Once established, the ESX will become the 30th exchange on the continent. At least 50 companies, including banks and insurance companies, are expected to list at the launch of the exchange.
18th May – Investors RoundTable: Our investment arm, FSD Africa Investments held an investments roundtable in Addis introducing its work as a provider of early-stage, risk-bearing capital and as a catalytic investor, seeking to drive innovative models and products that can address gaps in Africa’s financial market.
19th May – Launch of FSD Ethiopia, which will work to enable the development of the country’s financial sector. With funding from UKAID and the Bill and Melinda Gates Foundation, FSD Ethiopia will build on FSD Africa’s initial efforts to enhance the country’s financial sector.
20th May – Ethiopian insurers endorse Nairobi Declaration on Sustainable Insurance: Insurance stakeholders in Ethiopia have thrown their support behind the Nairobi Declaration on Sustainable Insurance. The Nairobi Declaration on Sustainable Insurance is a continental commitment by African insurance industry leaders to support the achievement of the SDGs. The Nairobi Declaration brings together local and international insurance firms to promote the achievement of SDGs and make it easier for them to understand the commitment to support the achievement of the SDGs.
We are pleased to be collaborating with the Government of Ethiopia in this historic initiative that will accelerate the development of capital markets in Eth Our assistance for establishing the Ethiopian Securities Exchange will leverage FSD Africa’s vast expertise and experience in developing capital markets infrastructure across Africa.
Mark Napier, CEO
We are all asset managers,” writes Professor Partha Dasgupta in his seminal study on the economics of biodiversity. “Whether as farmers or fishers, foresters or miners, households or companies, governments or communities,” we all influence the store of value held in our most precious asset — the natural world around us.
We depend on nature for food and water, for our health, and also for our economic wellbeing. Every business at some level depends on resources drawn from nature, such as crops, fish, timber, fibre, or rare earth elements, or on the stability of ecosystems.
Often we only see this when those ecosystems are upset such as when over-extraction from natural water sources causes drought or unsustainable agricultural practices lead to soil degradation and ultimately to food shortages.
And while, rightly, our attention is focused on our warming planet, we must recognise that the climate crisis and nature-loss are inextricably linked. All paths to net zero require the large-scale removal of com the atmosphere and the only affordable and immediately available methods of doing this are in nature.
Nowhere is this interdependency more clear than in Africa, which is among the regions of the world most vulnerable to climate change and most dependent on nature. With almost a quarter of its GDP dependent on nature, every development pathway for the continent relies on its responsible management.
But, between 1970 and 2016, the stock of natural capital in African countries fell on average by 65%, driven largely by land-use change. Almost three million hectares of rainforests in Africa are lost each year, resulting in soil degradation and unstable weather patterns, while drought and soil erosion have degraded 65% of its rangelands.
Africa’s reliance on nature is a source of vulnerability, but potentially also of competitive advantage.
Consider, for instance, that every $1 invested in marine protected areas in Senegal and Tanzania generates more than $5 000 in economic value, wetland conservation in South Africa returns $200, while agricultural land remediation in Uganda delivers $230.
What causes an economy to choose between destruction and regeneration, risk and opportunity, is its capacity and willingness to properly value nature. This begins with the financial sector.
Between now and 2030, there are $10-trillion of business opportunities up for grabs by investing in nature worldwide. But, to capture this potential, $2.7-trillion of finance needs to be redirected to nature-positive business opportunities. This may seem a huge ask, but financial institutions with $130-trillion in assets have already made similar climate change commitments through the Glasgow Financial Alliance for Net Zero.
There is simply no path to protecting and restoring nature without mobilising the huge reserves of private capital controlled by the financial sector. But these institutions need better quantitative data on their exposure to nature-related risks to make targeted decisions about their portfolios.
At a global level, the Taskforce for Nature-Related Financial Disclosures (TNFD) has recently been set up to respond to this challenge and create a harmonised framework for assessing and reporting these risks. If the TNFD is to work, it needs to avoid the pitfalls of standard-setting processes in the past, steer clear of an approach that only works for developed nations, and reflect the specific conditions of operating in regions like Africa.
Amid global efforts to retool finance in favour of nature, African nations have a unique opportunity to not only contribute, but to lead. COP27, later this year, is Africa’s COP where this link between prosperity and nature will at the heart of building resilience to climate change and to building sustainable livelihoods.
But, first, we need coordination across financial institutions to get the right data to unlock investments. That is why the United Nations Economic Commission for Africa (UNECA) and the financial sector development agency FSD Africa have joined together to launch the African Natural Capital Alliance (ANCA).
Led by some of Africa’s leading financial institutions and partnered with the TNFD, the ANCA will help financial institutions, finance ministries and regulators manage the risks and capture the opportunities tied to Africa’s natural capital.
Over the coming months, the alliance will work with financial institutions operating across the continent to help them better understand their exposure to nature-related risks and opportunities. This includes testing the TNFD’s draft framework among a group of pioneering members. These African financial institutions will share data and learnings from their pilots, acontribute to shaping this crucial standard.
The story of natural capital in Africa need not be one solely of risk and vulnerability. If protected and harnessed intelligently, Africa’s natural endowment can generate hundreds of thousands of new jobs and help reshape the economic system to suit the continent’s natural riches. The case is clearer than ever for Africa to seize its moment for global leadership.
This opinion editorial was originally published in the Mail & Guardian.
By 2025, more than a third of global assets under management could be ESG-aligned. With public budgets constrained in the wake of the Covid-19 pandemic, this mass transition by the financial sector has the capacity to drive green, inclusive, and resilient growth in the real economy. However, with limited skills, data, regulations and policies to support green finance, many of the most climate-exposed developing countries struggle to attract sustainable investment. At the same time, the greening of the global financial system must account for the unique challenges and opportunities in regions outside of Europe and North America or risk entrenching existing barriers to funding.
This event brings together expert voices from developing countries and private finance to show how nations with emerging financial sectors can lay the right foundations to tap into global pools of ESG-aligned capital and use it to accelerate the growth of green businesses. It will provide replicable examples of green financial market building and launch a conversation running through to COP27 on how developing countries can take a more prominent global role in transforming financial systems.
On Finance Day, 03 November, we convened a panel on Financial sector greening: Building foundations for sustainable finance in developing countries where policymakers, donors and the private sector came together to discuss how developed and developing countries can work collaboratively to help the latter develop local markets for green finance, attract a greater share of global sustainable investment, and shape international frameworks, standards and reporting.
Moderator: Dr Nicola Ranger – Deputy Director, UK Centre for Greening Finance and Investment
Panellists:
Ayaan Zeinab Adam – Senior Director and Chief Executive Officer AFC Capital Partners
Zoe Knight – Managing Director and Group Head of the HSBC Centre of Sustainable Finance
Mark Napier – CEO, FSD Africa
Alexia Latortue – Deputy CEO, Millennium Challenge Corporation
Flooding in urban areas across Africa is on the rise. The continent needs to implement risk-management techniques to ensure its cities are resilient to climate change and the devastation it can cause. This article explores possible ways Africa can build resilience against flooding in urban areas.
Across Africa the annual wet season sees our news reports and social media feeds “flooded” with images of commuters wading through rain and sewerage to get home, cars washed off roads and businesses and livelihoods floating on busy streets. Then, the cleanup begins, the news forgets, people rebuild and, before long, the process repeats.
But it shouldn’t be this way and if we don’t act now the situation will only get worse.
Take Lagos in Nigeria as an example: annual flooding in Lagos has risen in severity over recent years, as climate change progresses. In 2018 alone, flooding caused $4 billion worth of damage, costing around 4.1% of Lagos State’s GDP. The city struggles to manage and recover from these floods, which not only causes disruption to business and social activity but also threatens to eventually make the city unlivable.
Lagos is not alone. More than 70 urban areas face significant flood risks, with 171 million people in sub-Saharan Africa exposed to the dangers of flooding.
In 2019, over 1,000 people were displaced, with roads and bridges destroyed after several days of constant rain in Dar es Salaam. The same happened in 2017 and 2018. In August, at least seven people died after floodwater inundated Addis Ababa
While people will routinely think about taking out insurance for their cars and to cover their health needs, too often they don’t insure against risks like floods. In 2019, SwissRe estimated that 91% ($1 billion) of losses from climate risks in Africa were uninsured.
We need to better manage risk to make our cities more resilient to climate change and the devastation it can cause.
But where do we start? Using Lagos as an example, we combined data, interviews, and models to see how flood risk in the city could be better managed and identified five key takeaways for improvement.
When it comes to the big debates about climate change, Africa is the forgotten continent. It receives less than 3% of global climate finance and yet 30 out of the 40 most climate-vulnerable countries in the world are in Africa. It contributes the least to global warming and yet extreme weather events are growing in both frequency and severity with a shocking knock-on impact on biodiversity loss.
However, while we tend to see Africa merely as a victim of climate change, this ignores the fact that could be a large part of the solution as well.
From the forests of Gabon to the Congo Basin in Central Africa, the continent is rich in natural capital while countries like Kenya have been leading on the shift to green energy with 90% of its energy production already in renewables. Although progress has been too slow and fragmentary, African countries have been getting themselves ready to receive a much bigger share of global climate finance. Once this is invested in green projects, it will benefit the whole planet.
Kenyan President Uhuru Kenyatta’s visit to London has highlighted Kenya’s role as a leader in green finance. The country has already removed tax on interest on green bonds. It has drafted a green fiscal policy incentives framework covering the entire whole economy and is now considering a carbon tax as well. In addition, Kenya’s inaugural sovereign green bond is now imminent.
This is significant in several ways not least that it is about a new type of relationship between sub-Saharan Africa’s 3rd biggest economy and the UK; one based on investment rather than aid, whilst at the same time showing how smart, targeted British support, which has been crucial to the development of the green bond, can help unlock that investment.
There can be no better symbol of that new relationship than the agreement, announced between the City of London and Nairobi’s International Financial Centre (NIFC), backed by one of the UK’s biggest financial institutions. NIFC has been established to make it easier and more attractive for firms to offer financial services and related activities in Kenya and the region, reinforcing Kenya’s position as a hub for investment in the region. The hope is that the NIFC will provide a huge boost to investment in Kenya, and it is expected that an increasing amount of this will be from the UK and green.
For UK investors who may have shied away from what they regarded as risky investments, green bonds offer an attractive route to investing in developing markets because of the greater transparency requirements they need to be verified as genuinely green.
For Kenya and other developing countries, green finance is attractive because of the huge growth in ESG funds chasing investment opportunities. This is particularly important at a time when these countries are having to deal with the financial impact of the Covid pandemic.
If they are to truly capitalise on this opportunity, they will need to provide assurance to investors that they can offer a stable, regulatory environment. Having a clear tax and contract enforcement framework is vital. But they will also need to demonstrate their commitment to a green economic development pathway.
One of the biggest challenges for Kenya and other African countries is to create investment grade projects that are large enough to absorb the capital that is already available. For instance, a large institutional investor in the UK might look for a minimum investment size of $50-150m but they might only be allowed to take a small proportion of the total capital being raised. These two factors together would imply a total deal size that is huge by African standards.
So more effort needs to go into, first, supporting green project transaction development, and, secondly, creating the guarantee structures that will help to get the project financing over the line.
We also need different conduits to pool institutional capital and give big investors diversified exposure to a basket of green projects, so that Africa can get the capital it needs to build a sustainable future. That is where initiatives like the NIFC can play a big role in ensuring that Africa is no longer the forgotten continent but a leader in the green finance revolution.
This opinion piece was originally published in the print version of the East African on 30 July 2021.